Buying Businesses in Opportunity Zones & the Tax Advantages
You may or may not have heard of an Opportunity Zone (OZ), and the opportunities (pun intended) that they create for investors and entrepreneurs. Basically, an opportunity zone is "An economically distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment."
There are three main tax incentives that the opportunity zone program includes:
Immediate Deferral: If capital gains from appreciated assets are invested in a OZ within 180 days of receipt, a capital gain tax can be deferred.
Future Reduction: If the capital investment is held in a OZ for more than 5 years, there will be a 10% reduction in capital gain taxes. If the investment is held longer than 7 years, than there will be a 15% reduction in taxes.
Future Exclusion: If the capital invested is held in a OZ for 10 years or more than there will be no taxes incurred on capital gains.
The QOF program is relatively new and was included in the Tax Cuts and Jobs Act of 2017 which was created to stimulate growth in designated low-income communities in return for capital gains tax breaks. The program would essentially incentivize long-term private capital investment in poor areas. Currently, there are 8,762 opportunity zones in the US - 126 of them are in Colorado.
Colorado’s 126 opportunity zones represent exciting development possibilities and can be found throughout the state including areas like the Western Slope, space around Mile High Stadium, the I-70 Corridor near the National Western Stock Show Complex, and Denver International Airport. Currently designated opportunity zones will remain certified until the year 2028.
So how can you take advantage of an OZ?
By investing capital earned from the sale of an asset (think real estate, or a business) into a qualified opportunity the capital gain tax that would initially need to be paid can be deferred and/or mitigated. The designated zones include urban and rural geographies and offer up options for real estate development, business expansion, and infrastructure projects to name a few.
A qualified opportunity zone fund can consist of stocks, partnership interests, and business properties. Any eligible taxpayers such as individuals, C corps (RICs & REITs), S corps, partnerships, trusts, and estates are able to create or invest in qualified opportunity funds. To meet designated eligibility requirements a QOF must invest at least 90% of its assets in a OZ.
The opportunity zone program is a unique tool that incentivizes private capital investment into low-income communities in need of an economic boost, while also helping to mitigate large capital gain taxes required on the sale or exchange of assets. Within small business mergers and acquisitions this program offers a great way to put capital from the sale of a business to work, while keeping capital meant for retirement or investment safe from being greatly taxed. To learn more about how the opportunity zone program can work for you, we invite you to contact Transworld Business Advisors or visit our website for more information.
*The above is not tax advice. Transworld Business Advisors - Rocky Mountain and Jessica Fialkovich are not qualified tax advisors and any information presented should be verified with your tax professional.
Jessica Fialkovich is a mergers & acquisitions expert, keynote speaker, small business advocate, award-winning business owner, and Springsteen fan whose mission is to help business owners leave their legacy and exit successfully. Over the past 5 years, Jessica has overseen $60 million in transactions, was involved in 150 deals, and mentored 1,900+ business owners on buying and selling a business. Currently, she’s the President & Co-Founder of Transworld Business Advisors—Rocky Mountain, Colorado’s top business brokerage firm.
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